Why India’s growth momentum is losing steam

India’s growth momentum seems to be losing steam. After registering an 8.2 percent growth in 2023-24, the Indian economy grew by 5.4 percent in the second quarter of the current fiscal year (July-September 2024). This was the slowest growth in six quarters, almost three percentage points slower than the corresponding period of the previous fiscal year. The slowdown of the Indian economy was confirmed by the National Statistics Office (NSO) when its recently unveiled advance estimates of the GDP for the 2024-25 fiscal showed that the economy could grow by 6.4 percent, nearly two percent slower than the previous year. International institutions saw a slowing of the Indian economy early last year. In its assessment of global economic developments in April 2024, the IMF had predicted a drop in India’s growth rate from 7.8 percent in 2023 to 6.8 percent in 2024, and a tad down to 6.5 percent in 2025.

Though most economies would consider a growth rate above 6 percent “aspirational”, in India’s case this level of economic expansion must be considered inadequate given the present government has set the target of making the country a developed nation by 2047. Less than seven percent growth can cast a shadow over the realisation of this target. The expected slowdown should, therefore, be considered as a wake-up call for the government to take remedial action in several areas that are holding the economy back from growing at the rate it could. 

Undoubtedly, the most significant of these is the weakness in the demand side of the economy that has shown up in the first advance estimates for the current fiscal year through the two major components of the GDP, consumption expenditure and fixed capital formation, or investment. Though consumption expenditure is estimated to grow somewhat faster than in the previous fiscal year, its overall share in the GDP would continue to remain lower than expected. However, fixed capital formation should decelerate, according to the estimates.Over the past few years, the Central government has relied heavily on higher public investment, expecting it “to crowd-in private investment”, according to the country’s Finance Minister, Nirmala Sitharaman. 

The government’s move to use public investment as a driver was on account of the private sector’s disinclination to increase investments despite a steep reduction in corporate tax immediately preceding the Covid-19 pandemic. During the current fiscal year, private investment declined in two of the three quarters, including in the most recent third quarter. There are indications that public investment is also declining. Central government accounts show that in the first eight months of the current fiscal year (April-November), capital expenditure was more than 12 percent lower than in the corresponding period during the previous year. 

The government seems to be lacking in its intent of using public investment to “crowd-in private investment”. The sluggish behaviour of private consumption expenditure has adversely impacted the current growth trajectory. This is the largest component of GDP and, therefore, its most significant driver. It has remained sluggish ever since the effect of the government stimulus packages provided during the covid pandemic wore out. During 2021-22 and 2022-23, private consumption expenditure exceeded 60 percent of the GDP in two quarters, while in the following period it mostly remained in the mid-50 percent range, even declining to 53 percent in the third quarter of fiscal 2023-24. 

By the end of 2024, there were indications of a demand slowdown as sales of products ranging from cars to biscuits decreased. Automobile sales have been on a declining trend since the end of 2023 but after the middle of 2024, the decline became steep. By December 2024, automobiles sales dipped to negative territory on a year-on-year basis. FMCG companies, on the other hand, are expected to register low single-digit growth in their revenues as they hiked prices of their products due to rising cost of inputs.

These trends are largely attributable to the wage squeeze suffered by India’s workforce, a large majority of which is in the informal sector. But even the relatively small share of workers in the formal sector has experienced a decline in their real wages over the past few years. A recent report prepared for the government by the industry chamber, Federation of Indian Chamber of Commerce and Industry (FICCI) and Quess Corp Ltd, a business services provider, showed that while nominal wages across six major manufacturing and infrastructure sectors increased by 0.8-5.4 percent, retail inflation was between 4.8 percent and 5.7 percent, implying either stagnant or declining real wages.

Wage earners were impacted more than the retail inflation numbers suggest as food inflation in India was consistently much higher, often close to double digits. In sharp contrast, corporate profits increased four-fold during the same period. Growth in profit share and a reduction in the wage share in India’s formal sector has, unsurprisingly, caused sluggish demand conditions in the economy. Data on India’s labour market available from the Periodic Labour Force Survey support the findings of the FICCI-Quess Corp report. In 2023-24, the share of workers earning a regular wage/salary was just a fifth of the total workforce. Of this lot, 58 percent had no written job contract and 53 percent were not eligible for any social security benefit.

They clearly face considerable uncertainties regarding their wage earnings, which is no different from the condition of 80 percent of India’s workforce, the “self-employed” and casual labour. Unless the perverse conditions prevailing in the labour market are remedied, India will find it difficult to sustain high GDP growth, casting doubts regarding its ability to transform itself into a developed nation by 2047.

Biswajit Dhar is Distinguished Professor, Council for Social Development, New Delhi. He was a Professor at the Centre for Economic Studies and Planning in Jawaharlal Nehru University, New Delhi

Originally published under Creative Commons by 360info™

(Cover Photo: Slowdown of economic growth casts a shadow over Prime Minister Narendra Modi’s aim of making India a developed nation by 2047. Prime Minister’s Office, Government of India Credits “Narendra Modi government” by Prime Minister’s Office is marked with CC0 1.0.)